Lecture 9 Flashcards
Relevant costs and revenues:
Not all costs and revenues are relevant
Relevant:
1) Relevant costs and revenues:
Expected future costs or revenues
Need to differ among alternatives
2) Opportunity costs
-Not always easily visible
3) Qualitative factors
E.g. Customer satisfaction, reputation
Relevant costs and revenues:
Not all costs and revenues are relevant
Irrelevant
1) sunk costs
Past (historical) costs often irrelevant
(e.g. investment in plants, machines): cannot be changed
Costs “sunk” in the short-run may “surface” in the long run
2) Unit costs
Problematic as they can contail fixed (sunk?) costs
What other factors (besides financials) should wooden memory consider
E.g. reputation effect for existing and future relations
Business strategy is key for evaluating the effect of these decisions
How would decision change if current production was already 100 000 i.e. already at (near) capacity?
If production capacity is extended: “fixed” costs (e.g. rent, leases) are not really fixed any more –> previously irrelevant costs become relevant
If other business is sacrificed: Compensation for lost business becomes relevant (add opportunity costs as relevant costs)
Outsourcing Pros:
Lower costs due to competitive advantage of suppliers
Location (e.g. lower wages)
Skills (more advanced technology or knowledge)
No fixed costs in own books
Leaner production
Focus on core activities and strategic strengths
Outsourcing cons:
Proprietary costs (losing business secrets)
Dependencies (e,g, loss of knowledge/experties that cannot easily be “reactivated”)
Local/ communal responsibility: can mean laying off employees
Employee identity and corporate culture
Reputation risks
Quality concerns
Quality: what is important
Quality can be a way to guarantee customer satisfaction (which increases sales)
QUality is a competitive advantage; reduces costs and increases revenue
Types of quality
Conformance quality and design quality
Conformance quality
Is the performance of a products/services according to the design & prodct specifications
Design quality
How close do characteristics of products/services match needs and wants of customers
How can we keep track of quality
Develop financial and non financial measures to monitor both types of quality
Costs of quality:
Control costs: include
Prevention costs
Appraisal costs
Failure of control costs: include
Internal failure costs
External failure costs
Control costs
Cost incurred to prevent low quality products
Prevention and appraisal costs
Failure of control costs
Costs arising as a result of low-quality products
Internal failure costs
External failure costs
Prevention costs
Eg: design engineering
Supplier evaluations
Training
Appraisal costs
Eg:
Inspection
Product testing
Internal failure costs
Eg
Rework and retests
Breakdown maintenance
Delays
External failure costs
Customer support
Liability claims
Trainsportation costs
opportunity costs
Loss of potential gain from (the best of) the other alternatives when one alternative is chosen
Theory of constraints
A technique where the primary goal is to maximize throughput while simultaneously maintaining or decreasing inventory and operating costs
Theory of contraints: cycle
1) identify the system constraints (is the constraint internal (e.g. in production, engineering or planning) or external (e.g. in the market)?
2) Decide how to maximize the output from the constraint
3) subordinate everything else to this decisions
(the production capacity of the bottleneck resource should determine the production schedule for the organization)
4) Eleviate the systems bottlenecks:
Take actions to increase bottleneck efficiency and capacity (e.g. training, additional machines, outsourcing) after taking into account the cost of such actions
Throughput accounting
Focus on the contrained resource
The objective is to increase throughput contribution minus the incremental costs of alleviating constraint/s
Throughput contribution (=price - direct material cost)
Role of the management accountant
Calculate the throughput contribution
Calculate the identify relevant and irrelevant costs
Conduct cost-benefit analyses of alternative actions to increase efficiency and capacity
Complexities
More machines and products can significantly increase complexity
Different orders (of prioritizing lucrative products) possible
Analytical or simulation
